Court: United States Bankruptcy Court, D. Massachusetts; June 4, 2012; Us Bankruptcy; United States Bankruptcy Court
The Court is addressing a 'Turnover Motion' filed by John Robert Lees and Mat Ng, the Foreign Representatives, seeking an order under 11 U.S.C. § 1521(a)(5) and 1521(b) for the turnover of all assets belonging to the Foreign Debtors in the United States. The U.S. Companies, including Oasis Development Enterprises, Inc. and East-West Enterprises Co. Ltd., have opposed this motion. A trial was held on February 6, 2012, where two witnesses testified, and 43 exhibits were presented. The primary dispute is whether the Foreign Representatives are entitled to the Foreign Debtors’ equity interests in the U.S. Companies.
Critical legal issues include the entitlement of the Foreign Representatives to these equity interests and whether granting the Turnover Motion would sufficiently protect the interests of creditors and other parties, as mandated by 11 U.S.C. § 1522(a). There are unresolved subsidiary issues regarding the burden of proof concerning the protection of interests under Chapter 15 of the Bankruptcy Code. The material facts are largely agreed upon, but the implications of transferring the equity interests are contested, with concerns that granting the motion may lead to defaults on mortgages and expose individuals to significant liabilities. Furthermore, existing rights of first refusal and transfer restrictions may complicate the turnover process. Ultimately, the only unresolved issue pertains to the equity interests in the U.S. Companies.
The Foreign Representatives indicated in their Turnover Motion that the current real estate market suggests the Equity Interests possess limited liquidation value. They plan to assess whether to hold these interests in trust for creditors, anticipating a market recovery, or to conduct a public sale under section 363 of the Bankruptcy Code to optimize value for the Foreign Debtors’ estates. The Foreign Debtors, akin to a Chapter 7 Trustee, can assume ownership of the Equity Interests, but any sale or liquidation actions must adhere to relevant stockholder agreements and U.S. law.
Background details include the Foreign Representatives' filing on November 24, 2009, for recognition of a foreign main proceeding under 11 U.S.C. §§ 1515 and 1517, alongside relief under §§ 1520 and 1521, following the Foreign Debtors' bankruptcy adjudication on August 31, 2009. This bankruptcy stemmed from petitions filed in Hong Kong by Value Partners Strategic Equity Fund and Winchester Finance Company Limited due to substantial debts tied to the failure of Oasis Hong Kong Airlines Limited, totaling approximately $33 million, exclusive of significant contingent debts owed to the Bank of China.
At the time of bankruptcy, the Foreign Debtors owned substantial property interests in the U.S., including direct and indirect stakes in over 20 properties through various corporate structures. Their key interests are in OCI, ODE, and EWE. ODE is a Massachusetts-based real estate investment and management corporation controlling the Oasis Group, with 16 properties. Raymond Lee serves as its Chairman and CEO, with Priscilla Lee as Co-President. OCI, also a Massachusetts corporation, provides services to ODE and employs 10 individuals, with both Foreign Debtors as directors. Collectively, the Foreign Debtors hold 71.4% of shares in both ODE and OCI, while Raymond and Priscilla Lee own 38.1% and 83.3%, respectively. The Oasis Group's portfolio includes 16 commercial properties, primarily in Massachusetts, with one located in Las Vegas, Nevada.
The Foreign Debtors hold a 40.48% stake in Oasis Ten Milk Street LLC, while EWE owns 27.932%. Raymond Lee serves as President of both Oasis Ten Milk Street Associates, Inc. and Oasis Ten Milk Street, LLC. Additionally, the Foreign Debtors own 45.25% of ODE Asia, LLC, which holds 100% of Oasis Net Leased Holdings LLC. This LLC manages membership interests in 11 single-asset, special purpose entities known as the Net Leased Portfolio, which also includes investments from over 30 individual and institutional investors. EWE directly owns five commercial properties in Massachusetts, totaling over 150,000 square feet and leased to more than 60 tenants. Raymond Lee, along with his siblings David and Karen C. Lee, each owns a third of EWE, which holds 99% of Oasis Northwoods, LLC, the record owner of a property in Danvers, Massachusetts, currently in receivership.
Two additional properties, 700 Longwater Drive and 50 Dunham Road, are linked to a Turnover Motion due to guaranty agreements signed by Raymond Lee. The 700 Longwater Drive property, owned by Oasis 700 Longwater LLC, was financed by Column Financial, Inc. The 50 Dunham Road property, previously owned by Fifty Dunham Road LLC, was sold in December 2011 for $2,300,000, despite having a $9,000,000 mortgage. The sale involved an agreement releasing certain reserve accounts to Eastern Bank, which subsequently canceled over $4.3 million in debt, released its mortgage, and discharged Raymond C. Lee from his guaranty.
Profits from the ODE and EWE properties are distributed to investors after debt service while ensuring adequate cash reserves for operations and improvements. Evidence of the value of the ODE and EWE properties includes an appraisal from August 1, 2009, estimating the total value at $175,190,000 against loan balances of $228,081,635, supplemented by an affidavit from Ms. Adams.
Ms. Adams conducted valuations on 18 properties using two methods: discounted cash flow (DCF) and direct capitalization, applying discount rates between 9.5% and 13% for DCF and capitalization rates from 7% to 9% for direct capitalization. The Net Leased Portfolio, part of the Oasis Group, consists of 11 properties (10 in Massachusetts, 1 in Nevada), each owned by separate limited liability companies under Oasis Net Leased Holdings LLC. Ten of these properties are collectively secured under a $120 million loan (WFB Loan) from Wells Fargo Bank, now with a principal balance of $113,723,178 as of January 1, 2012. The estimated value of the 10 properties securing this loan is $69,885,000, indicating a negative equity of $43,838,178.
In relation to the EWE portfolio, which secures a $10,900,000 loan (Eastern Loan) from Eastern Bank, the principal balance as of January 1, 2012, is $10,248,806. The cash flow turned negative in July 2010 due to tenant loss and declining rents, resulting in a $200,000 shortfall covered by the borrower. The loan matured on September 1, 2011, with ongoing negotiations for an extension expected to finalize by the end of January, reducing the interest rate from 5.25% to 4.25% and requiring the sale of two properties by July 31, 2012, with the remaining balance to be settled by December 31, 2012. The value of the five commercial properties in the EWE portfolio is estimated at $13,034,000, giving an owner's equity of $2,785,194. Additionally, Ms. Adams appraised the 10 Milk Street property in Boston, which is financed by a $58 million loan from Merrill Lynch Mortgage Lending, Inc., with administration under a special servicer.
As of January 1, 2012, the principal balance for the Milk Street Loan was $58,000,000, with the property's value at $45,735,000, resulting in negative equity of $12,265,000. For the property at 700 Longwater Drive in Norwell, Massachusetts, the original loan amount was $8,650,000, with a principal balance of $8,641,471 and a property value of $7,510,000, leading to negative equity of $1,131,471. In contrast, the unencumbered property at 7 Concord Farms, Concord, MA, was valued at $528,000, resulting in equivalent owner’s equity.
The financing of the Oasis Group and EWE portfolio properties involved multiple promissory notes and mortgages, including guaranties from Raymond Lee, which contain provisions regarding defaults and equity transfer restrictions. During the trial, Ms. Garzón cited relevant provisions from these documents. Specifically, on November 14, 2005, the single-asset, special purpose LLCs of the Oasis Net Leased properties executed a $120,000,000 promissory note to Wells Fargo Bank, due December 5, 2015, secured by multiple mortgages and assignments related to properties in Massachusetts and Nevada.
The mortgage for the Concord Farms entities includes standard default clauses. Article 7 outlines conditions for defaults, including an "Optional Default" clause under Article 7.1.a, triggered by the failure to meet obligations under the loan documents. Specifically, failure to cure such defaults within 30 days after written notice can lead to default status. Additionally, Article 7.1.a.iii states that any materially misleading statements made by the borrower or guarantor can also serve as grounds for declaring an Optional Default.
Ms. Garzón identified specific defaults and referenced Article 6.15, titled 'Due on Sale/Encumbrance.' Article 6.15.c.(i) prohibits any transfer of legal or beneficial interests in a Restricted Party, which includes changes in management for limited liability companies. Article 6.15.c.(ii) allows transfers not exceeding 49% of certain interests in a Restricted Party, provided that management control remains unchanged and the Minimum Equity Requirement is met. The Minimum Equity Requirement mandates that Raymond C. Lee or related family trusts shall maintain at least a 30% ownership and control over the Mortgagor's operations. A 'Qualified Raymond Lee Family Member' includes close relatives of Raymond C. Lee eligible for managerial roles.
Article 4.4 outlines the rights of the Mortgagee in the event of default, allowing the Mortgagee to demand the assembly and availability of collateral, enter the property to take possession or dispose of collateral without prior notice, and sell or assign collateral. Ms. Garzón also referred to a Mortgage, Assignment of Leases and Rents, and Security Agreement linked to a $58,000,000 loan from Merrill Lynch, emphasizing that Article 6.2(a) prohibits any sale or pledge of the property or interests in a Restricted Party without lender consent, except for tenant leases. The definition of 'Restricted Party' includes the Borrower, Guarantor, and related entities, indicating that transfers of interests or shares of Foreign Debtors would be considered prohibited.
Section 6.3 of the Loan Agreement mandates that Raymond C. Lee must maintain at least a 25% ownership interest and control over the Borrower, while also serving as the Guarantor. Article 10 outlines that any actions against the Borrower or Guarantor under creditors' rights laws will trigger an event of default, activating remedies in Section 10.2. Ms. Garzón provided testimony regarding a $6,256,000 loan from Column Financial to Oasis 700 Longwater LLC, citing a Mortgage and Security Agreement dated November 20, 2003. According to Section 1.13 of Article 1, which addresses covenants, limited liability company members may transfer up to 33% of non-managing interests freely and can transfer a similar percentage of managers’ interests without lender consent, provided management remains unchanged. Article II, Section 2.1 details additional events of default, including unauthorized transfers or encumbrances of the Borrower’s assets and insolvency of managing members or guarantors. An Indemnity and Guaranty Agreement was executed by Raymond Lee on November 6, 2009. The Court notes that lenders, including Wells Fargo and Merrill Lynch, did not file notices of appearance in Chapter 15 cases, raising questions about their awareness of these proceedings. The Court infers that lenders are aware of both Hong Kong and local proceedings based on loan document provisions and the lack of contingent claims filed against Lee in Hong Kong. Ms. Garzón also referenced Article V of ODE's Articles of Organization, which imposes strict transfer restrictions on stockholders regarding the disposition of shares, requiring adherence to specific agreements among stockholders.
Transfers of Stock are restricted under Article V, with exceptions for Authorized Transferees such as: (a) a stockholder acting as the sole trustee of a revocable trust, and (b) a corporation where the stockholder holds a majority of voting capital stock. However, Stock transferred to Authorized Transferees remains subject to Article V provisions.
Stockholders or their Authorized Transferees must provide written notice to the corporation before selling, assigning, or transferring shares, detailing the transferee and terms of the transfer, including a bona fide purchase offer for fair value. This notice grants the corporation a right of first refusal.
A Transfer Event can occur under specific circumstances such as legal judgments requiring a stock transfer. Stockholders must notify the corporation within 10 days of such events. If the corporation does not exercise its right of first purchase, the new transferee may retain the Stock, adhering to Article V provisions.
Additionally, any stockholder wishing to sell or transfer shares must first offer them to the corporation through its Board of Directors, and no transfers will be recorded until compliance with these provisions is ensured, although the Board may waive these requirements.
In parallel, the Amended and Restated Operating Agreement for ODE Asia, LLC prohibits members from transferring their interests without written consent from the manager. Any unauthorized transfer is considered null and void, with the transferred interest limited to rights to allocations and distributions, without conferring membership status to the transferee.
Ms. Garzón testified that the transfer restrictions in ODE Asia, LLC’s Operating Agreement are standard for single-asset, special purpose entities within the Oasis Group portfolio. She noted that Raymond Lee's bankruptcy would trigger a default under multiple loan documents, specifically referencing Section 7.1(b)(iii) of the Wells Fargo Mortgage, Section 10.1(f)(ii) of the Merrill Lynch Mortgage, and Section 2.1(h) of the Column Financial loan documents. Certain transfers require the written consent of the manager, ODE, and decisions related to ODE Asia LLC are made by its Board of Directors, consisting of Foreign Debtors, Karen Wang, and Phillip Lee. Regarding EWE, she stated that transfers are similarly restricted without Board approval, with members being siblings Raymond, Karen, and David Lee, each holding a one-third interest.
The Amended Order Granting Recognition of Foreign Main Proceedings was entered by the Court on April 7, 2011, around 16 months after the Chapter 15 petitions were filed. This order confirmed the Court's jurisdiction under 28 U.S.C. 157, 1334 and recognized Hong Kong as the center of main interest for the Foreign Debtors. Under Hong Kong's Bankruptcy Ordinance, individual bankruptcy cases begin when individuals are adjudged bankrupt and last four years, with potential extensions for the Foreign Representatives. The order entrusted the Foreign Representatives with the management and distribution of the Foreign Debtors’ U.S. assets, in accordance with 11 U.S.C. 1521(a)(5).
The attached Stipulation indicated that the U.S. Companies estimate debts owed to the Foreign Debtors totaling approximately $3,340,070.14, including $47,354.95 in salary and $952,548.69 in unpaid distributions from ODE. The U.S. Companies committed to paying the Foreign Representatives the amounts owed for salary and distributions from other U.S. Companies, totaling an estimated $795,627.92. For the duration of the Foreign Debtors’ bankruptcy proceedings in Hong Kong, all salary owed by the U.S. Companies will be directed to the Foreign Representatives.
During the Foreign Debtors' bankruptcy proceedings in Hong Kong, any distributions made by U.S. Companies to equity holders will direct the Foreign Debtors' pro rata share to the Foreign Representatives as instructed by them. Similarly, any payments owed to the Foreign Debtors, including those on the promissory note referenced earlier, must also be directed to the Foreign Representatives. The Foreign Representatives are restricted from taking actions regarding the Foreign Debtors' equity interests in U.S. Companies, except for initiating proceedings in the Bankruptcy Court. All parties retain their rights concerning these equity interests, which remain subject to the automatic stay under specific bankruptcy provisions.
The Debtors, as guarantors of the U.S. Companies' debts, may agree to restructuring of the underlying debt without incurring new financial obligations or increasing the existing guaranteed amounts. Any such restructuring must be communicated to the Foreign Representatives in advance, along with relevant documentation. Actions taken by the Foreign Representatives against U.S. Companies will be governed by U.S. law and must be exclusively brought in U.S. courts.
Additionally, the Foreign Debtors are required to grant the Foreign Representatives and their advisors access to the U.S. Companies' financial records for oversight purposes. A stipulation approved by the Court on February 6, 2012, altered a previous agreement, stating that all income earned by the Foreign Debtors will be paid directly to them, while U.S. Earned Income will no longer be directed to the Foreign Representatives, as previously outlined in the Recognition Order Stipulation.
U.S. Earned Income generated by the Foreign Debtors prior to the stipulation must be transferred to the Foreign Representatives upon Bankruptcy Court approval if not already turned over. If the Foreign Debtors’ joint gross Earned Income exceeds $144,000 in a payment cycle (March 1 to February end), the excess must also be paid to the Foreign Representatives. They are responsible for taxes on the Earned Income turned over. Both parties retain the right to seek adjustments to the claimed Earned Income from the Hong Kong Bankruptcy Court. The stipulation does not alter the Foreign Representatives' right to pursue an “income payments order” under Hong Kong law and does not address issues related to the equity interests in specific corporations held by the Foreign Debtors. The Recognition Order Stipulation remains effective unless inconsistent with this agreement.
Affidavit evidence presented by Ms. Garzón indicates that as of February 1, 2012, the U.S. Companies had paid $2,797,353.38 to the Foreign Representatives. Mr. Lees, the Foreign Representative, confirmed their commitment to abide by U.S. court decisions while fulfilling their duty under Hong Kong law to manage all bankrupts' assets. He expressed a long-term approach, willing to remain involved for several years to enhance asset values and indicated a desire to participate actively in decision-making regarding asset transactions. Additionally, Mr. Lees explained that extensions of the standard four-year bankruptcy period in Hong Kong could be requested if justified, noting that assets are typically collected and distributed within that timeframe.
Mr. Lees stated that he could not criticize decisions regarding the sale of the 50 Dunham Road property or the loan modification for Ten Milk Street, but noted that the Foreign Representatives were informed of these decisions only after they were made. He emphasized the need for strict corporate governance to ensure timely communication about such matters. He affirmed that the Foreign Representatives would prioritize the interests of non-debtor shareholders and could not act in a way that would significantly harm other investors. He saw no foreseeable conflict between the interests of the Foreign Debtors' creditors and those of other equity holders in the U.S. Companies.
Regarding the vesting of the Foreign Debtors’ shares in the U.S. Companies, Mr. Lees had not attempted to sell these shares and had not received unsolicited offers, stating that any sale would need to comply with existing restrictions. He expressed a desire for more detailed management information than what was currently provided through quarterly reports.
He referenced Section 61(a) of the Hong Kong Bankruptcy Ordinance, which allows him to carry on the bankrupts' business as necessary for beneficial winding up, while noting that the Foreign Debtors do not operate businesses but own equity interests in companies. He indicated that the creditors' committee supports the vesting of the Foreign Debtors’ equity interests in the Foreign Representatives, which led to the filing of the Turnover Motion. Mr. Lees warned that denial of this motion could extend the Hong Kong bankruptcies due to unresolved business matters.
The Foreign Representatives, supported by the Declaration of Richard David Hudson from Deacons law firm, argue that Hong Kong law allows for the vesting of equity interests in them as trustees of the bankrupts, and that this vesting does not constitute a transfer under the Articles of Organization of ODE or other governing documents.
Under Hong Kong law, shares owned by Foreign Debtors in ODE and EWE automatically vested in the Foreign Representatives as trustees upon their appointment, despite any transfer restrictions. This is based on Sections 43, 53, and 58 of the Hong Kong Bankruptcy Ordinance, particularly Section 58(3), which states that debtor property vests in the trustee without the need for conveyance or assignment. The Foreign Representatives argue that since vesting does not constitute a transfer, corporate transfer restrictions cannot apply. They also reference Section 53(3), allowing trustees to transfer property as the bankrupt could have done prior to bankruptcy, and Section 43(5), which clarifies that property in the bankrupt's estate is subject to third-party rights but does not permit those rights to obstruct the vesting of shares.
The Foreign Representatives further contend that even if vesting were seen as triggering transfer restrictions under the Articles of Organization or LLC Operating Agreements, enforcing such restrictions would undermine the principles of Chapter 15. They maintain that provisions of the Hong Kong Bankruptcy Ordinance align with the U.S. Bankruptcy Code, allowing them to operate within the confines of existing agreements while making decisions reflective of the estates' equity interests. Citing case law, they assert that all contractual rights and interests became part of the bankruptcy estate upon filing, and restrictions under operating agreements or state laws do not hinder the vesting of these rights. Consequently, they conclude that they should be able to control the equity interests of approximately 72% in ODE and possess rights in EWE commensurate with the interests held by individual stakeholders, particularly regarding governance matters involving Raymond Lee, the President of EWE.
Ms. Adams’ Affidavit states that the loan matured in September 2011, and a forbearance agreement requires EWE to sell two out of five properties by June 30, 2012, with potential additional sales by the end of 2012 to satisfy the loan. The Foreign Representatives assert their actions are governed by Hong Kong law, aiming to maximize equity interests for the estate and engage professionals for asset protection, claiming alignment of interests with other stakeholders in the U.S. Companies. They argue that Chapter 15 provisions preempt state law transfer restrictions, allowing the Court to entrust the Foreign Debtors' equity interests to them, akin to outcomes in a Chapter 7 case under 11 U.S.C. 541(c)(1). The Foreign Representatives emphasize principles of comity and cooperation in Chapter 15, urging the Court to prevent the Foreign Debtors from shielding U.S. assets from foreign creditors, a maneuver not permissible in Chapter 7 cases.
They refute claims from the Foreign Debtors and U.S. Companies that loan defaults necessitate denial of the Turnover Motion, pointing out the lack of lender testimony and highlighting that the Hong Kong proceedings constitute a default. They note that EWE's loan is in default but has been subject to negotiated forbearance agreements. The Foreign Representatives assert that the U.S. Companies are also in default due to the Lees’ bankruptcy in Hong Kong and reference a forgiven $4 million debt related to the sale of a property. They contend that there is no credible evidence that lenders would act negatively if the Turnover Motion were granted, as lenders have cooperated with borrowers.
Regarding Chapter 15's requirement for creditor protection under 11 U.S.C. 1522(a), they cite the case In re Atlas Shipping A/S, indicating that sufficient protection is based on the foreign jurisdiction's laws safeguarding creditors. They argue that adequate protection exists due to similarities between the Hong Kong Bankruptcy Ordinance and the U.S. Bankruptcy Code, recognizing their obligation to adhere to relevant transfer restrictions. The Foreign Debtors align with the U.S. Companies' arguments, leading to a combined presentation of their positions.
U.S. Companies assert that disputes involving them must be adjudicated under U.S. law in U.S. courts, referencing a Stipulation Regarding Verified Petitions from February 25, 2011, which prohibits the Foreign Representatives from acting on equity interests without a court order or party agreement. They argue that U.S. law and Chapter 15 of the Bankruptcy Code, particularly 11 U.S.C. 1522, should govern the rights of parties and protect the interests of debtors and U.S. Companies, emphasizing their 30 shareholders’ investments exceeding $34 million. The Companies contend that any transfer of equity interests to Foreign Representatives should respect existing share transfer restrictions in their Articles of Organization. They distinguish between the Foreign Representatives managing portfolios and the potential liquidation of companies, asserting that ownership does not equate to management rights, especially since operations have been equitable for all shareholders. They argue that any turnover sought by Foreign Representatives should comply with transfer restrictions and that disputes regarding equity interests should be litigated in this Court. The Companies maintain that protections for shareholders under these restrictions apply to Foreign Representatives only when they transfer interests to third parties and reference the Hong Kong Bankruptcy Ordinance to support their claims about property rights not violating transfer restrictions.
U.S. Companies express concerns that their equity holders' interests are inadequately protected due to the influence of Foreign Representatives, despite assurances from Mr. Lees regarding their benevolence. They argue against the Turnover Motion, asserting that any future actions by the Foreign Representatives affecting company management should be addressed in court. The U.S. Companies reference the Wong Declaration, which supports their position by stating that the vesting of equity interests under Hong Kong bankruptcy law does not equate to a complete transfer of rights, and that the Foreign Representatives' control is restricted by stock transfer limitations in the U.S. Companies’ documents valid under Massachusetts law. They contend that the Foreign Representatives misinterpret the implications of the vesting process, emphasizing that full ownership requires compliance with stock transfer procedures, including registration as a shareholder in Hong Kong. The U.S. Companies highlight that while initial vesting may not trigger transfer restrictions, subsequent stages do, and cite Section 43(5) of the Bankruptcy Ordinance to assert that equity interests vest subject to third-party rights. They conclude that the necessary prerequisites for a share transfer apply to the Foreign Representatives as well. The Turnover Motion aims to determine the appropriate management of the Foreign Debtors’ equity interests, considering the interests of creditors.
The excerpt addresses the interaction between the Hong Kong Bankruptcy Ordinance and Chapter 15 of the U.S. Bankruptcy Code. Under Section 103(a) of the Bankruptcy Code, specific chapters apply to various bankruptcy cases, but neither Section 541(a) nor 541(c)(1) is relevant for determining the property of Hong Kong bankruptcy estates; such determinations must adhere to Hong Kong law. If Section 541(c) were applicable, it would render certain transfer restrictions in organizational documents unenforceable. Chapter 15 supports the governance of what constitutes property of foreign debtors' bankruptcy estates under the Hong Kong Ordinance, while also outlining the rights of foreign representatives concerning that property, within the framework of protections provided by both statutes.
Section 1501 of the Bankruptcy Code emphasizes that Chapter 15 aims to enhance cooperation between U.S. and foreign courts. The excerpt references case law that illustrates how Chapter 15 retains principles from the previously existing Section 304 of the Bankruptcy Code, particularly regarding the authority granted to foreign representatives to manage U.S. assets. It highlights that courts are to be guided by comity when assessing requests for additional assistance under Chapter 15, aligning with the need for an efficient administration of the estate. Furthermore, under Section 58 of the Hong Kong Bankruptcy Ordinance, property of a bankrupt individual automatically vests in an Official Receiver upon the issuance of a bankruptcy order.
Upon the appointment of a trustee, the property of a bankrupt individual transfers to the trustee, specifically in this case to the Foreign Representatives for Raymond and Priscilla Lee. The bankrupt’s estate, as defined by Section 43(l)(a) of the Bankruptcy Ordinance, includes all property belonging to or vested in the bankrupt at the start of bankruptcy, as well as any property categorized under the Ordinance. Unlike the Bankruptcy Code, which allows for the debtor’s interest in property to become part of the estate regardless of any transfer restrictions, the Hong Kong Bankruptcy Ordinance acknowledges existing rights of other parties, such as secured creditors, in relation to the property.
Resolution of disputes related to the bankrupt's estate requires interpretation of Chapter 15 provisions of the Bankruptcy Code. Section 1521 allows for relief upon recognition of a foreign proceeding, permitting the Bankruptcy Court to authorize the foreign representative to manage or distribute the debtor's assets within the U.S., ensuring that U.S. creditors’ interests are protected. Additionally, Section 1522(a) stipulates that the Court may grant or modify relief only when the interests of creditors and other interested parties are sufficiently safeguarded. The overarching goals of Chapter 15 include the protection and maximization of the debtor's asset value, and the Court is directed to interpret this chapter with consideration for its international context and the need for consistent application across jurisdictions. The case In re Tri-Cont’l Exch. Ltd. underscores the importance of uniform interpretation in this regard.
Congress directed U.S. courts to consider various international sources as persuasive when interpreting Chapter 15, particularly the Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency. Courts must ensure that relief protects the debtor's assets and the interests of creditors and other stakeholders. The California bankruptcy court emphasized that any protective measures related to discretionary relief should balance the interests of foreign representatives with those affected, avoiding favoritism among creditors. The court in In re Atlas Shipping A/S identified three fundamental principles of "sufficient protection": equitable treatment of claim holders, safeguarding U.S. claimants from disadvantages in foreign proceedings, and aligning distribution of foreign estate proceeds with U.S. law.
The dispute at hand involves the Foreign Representatives seeking turnover of the Foreign Debtors’ equity interests for administration and distribution. The central question is whether this request constitutes more than merely "stepping into the shoes" of the Foreign Debtors, potentially triggering loan document defaults and affecting rights stipulated in organizational agreements. Additionally, the broader issue is whether granting the Turnover Motion would enable the Foreign Representatives to manage and sell these interests if market conditions improve. Regarding burdens of proof, the court noted that no specific precedents were found for turnover motions under Chapter 15; thus, the Foreign Representatives bear the initial burden to demonstrate entitlement to relief under 11 U.S.C. § 1521(a)(5), (b).
The Court has determined that the Foreign Representatives are responsible for managing and realizing the Foreign Debtors’ equity interests in U.S. Companies, as well as distributing these equity interests as part of the Foreign Debtors' U.S. assets. The initial burden to demonstrate that the interests of the Foreign Debtors and U.S. Companies are adequately protected lies with the Foreign Representatives; however, the ultimate burden of proving insufficient protection falls on the objecting parties. This approach aligns with the burden of proof related to turnover motions under 11 U.S.C. § 542, despite this section not applying to Chapter 15 cases. The Court finds that applying this burden is equitable, given that the U.S. Companies have not claimed to be creditors of the Foreign Debtors.
Citing *In re Meyers*, the Court references the traditional burdens of persuasion in turnover actions, where the trustee must establish a prima facie case for turnover, after which the debtor must provide a reason to proceed, though the ultimate burden remains with the trustee. The Court emphasizes that requiring extensive investigations before filing a turnover order would unnecessarily increase bankruptcy estate costs. It notes a dispute exists regarding whether the trustee must establish the estate's right to property by a preponderance of the evidence or by clear and convincing evidence. While the Court leans towards the preponderance standard, it does not resolve this issue as the outcome would be the same under either standard.
Additionally, the Court acknowledges that turnover, unlike recognition, is discretionary, as reflected in various case law, emphasizing the equitable nature of turnover actions.
The Court determined that the Foreign Representatives met their burden of proof by a preponderance of the evidence based on several factors. First, the objectives of Chapter 15 in 11 U.S.C. 1501 align with the Hong Kong Bankruptcy Ordinance and are consistent with the Bankruptcy Code, as supported by case law. Second, Mr. Lees provided credible testimony outlining reasonable goals for realizing the Foreign Debtors’ equity interests. Third, the parties had a stipulation agreeing that U.S. law governs actions by the Foreign Representatives against U.S. Companies regarding the liquidation of the Foreign Debtors’ interests. Fourth, fiduciary duties applicable to shareholders and members of limited liability companies were acknowledged. Fifth, the U.S. Companies have not claimed creditor status in relation to the Foreign Debtors.
The Court further concluded that the U.S. Companies and Foreign Debtors must demonstrate insufficient protection to counter the Turnover Motion, which the Foreign Representatives satisfactorily established. The Hong Kong Bankruptcy Ordinance ensures fair treatment for claim holders against the Foreign Debtors’ estate, with distributions aligning closely with the Bankruptcy Code, thereby not prejudicing U.S. claimants due to ongoing Chapter 15 proceedings. Although concerns regarding defaults and transfer restrictions were raised, the U.S. Companies failed to prove that their interests would not be adequately protected if the motion were granted.
The provisions of Chapter 15 and the Hong Kong Bankruptcy Ordinance emphasize promoting applications consistent with similar foreign statutes. Both frameworks detail trustee and debtor duties, creditor distribution priorities, and the recovery of fraudulent transfers. Specifically, Section 60 of the Hong Kong Bankruptcy Ordinance outlines the powers of Foreign Representatives, including taking custody of the bankrupt's property and executing necessary actions for asset distribution. Additionally, Section 62 allows the Foreign Representatives to appoint the bankrupt to assist in managing the property with creditor committee approval.
Utilization of the provision by Foreign Representatives can reduce estate costs and address potential conflicts concerning Raymond Lee's management of ODE and EWE. Under Section 26(3) of the Bankruptcy Ordinance, Foreign Debtors are obligated to assist in realizing property and distributing proceeds to creditors, paralleling the requirement in 11 U.S.C. 521(a)(3) for debtors to cooperate with trustees. Sections 37 and 38 of the Bankruptcy Ordinance prioritize claims similar to the Bankruptcy Code. The court finds Mr. Lees’ testimony credible, noting his responsibility to control the Foreign Debtors’ equity interests, akin to a trustee's duties under U.S. law. Mr. Lees emphasized that the Foreign Representatives, experienced insolvency professionals, would respect transfer restrictions and would not hastily liquidate the Foreign Debtors’ interests, thereby safeguarding U.S. Companies' rights. Additionally, the Foreign Representatives are entitled to participate actively in decision-making rather than merely receiving distributions, particularly in light of loan modifications affecting Oasis Ten Milk Street LLC and the EWE portfolio. The parties have agreed to the applicability of U.S. laws, ensuring protection for U.S. Companies against any attempts by the Foreign Representatives to liquidate or challenge the management of U.S. Companies, as governed by U.S. law. The Turnover Motion references 11 U.S.C. 363, confirming the relevance of U.S. statutes to the situation. Finally, stockholders in closely held corporations like ODE and EWE owe fiduciary duties to one another.
Stockholders in close corporations are required to uphold a fiduciary duty akin to that owed by partners in a partnership, characterized by utmost good faith and loyalty. This duty mandates that they must manage their responsibilities without acting out of greed or self-interest, ensuring that their actions do not undermine the interests of fellow stockholders or the corporation itself. This principle also extends to members of limited liability companies, who are similarly bound to act with respect toward their fellow members. The Foreign Representatives, acting on behalf of the Foreign Debtors, must adhere to these fiduciary obligations under Massachusetts law. Should they neglect the rights or duties owed to the Foreign Debtors or U.S. Companies, the court is positioned to resolve any disputes that arise.
In addressing the Turnover Motion, the Foreign Debtors and U.S. Companies highlight the loan documents' default provisions and Raymond Lee's potential personal liability as a guarantor for approximately $217 million. The court notes that while lenders could have issued default notices in light of the Hong Kong proceedings, they have not taken such actions, nor have they pursued the enforcement of any guaranties related to specific properties. The evidence presented does not indicate that lenders are likely to act on these provisions in the ongoing Chapter 15 cases, and none have formally participated in the proceedings.
Existing defaults were noted due to the initiation of Hong Kong proceedings and the failure to repay the Eastern Bank loan at maturity, along with possible modifications to the Oasis Ten Milk Street loan. The Court determined that the risk of default declarations does not sufficiently protect the interests of the Foreign Debtors and U.S. Companies, especially since, under both the Hong Kong Bankruptcy Ordinance and the Bankruptcy Code, the interests of U.S. Companies, viewed as non-creditors, must yield to those of Hong Kong creditors.
Regarding transfer restrictions, the Foreign Representatives, through Mr. Lees's testimony, indicated adherence to these restrictions under Section 43(5) of the Hong Kong Bankruptcy Ordinance. They argued that mere vesting does not invoke the rights of first purchase, a claim contested by the Foreign Debtors and U.S. Companies, which is a key point in the case.
The Articles of Organization for ODE present a complex transfer restriction in Article V, Paragraph 4.(a)(iv), stating that a transfer event occurs when a stockholder is required to transfer stock to someone other than an Authorized Transferee due to a legal judgment or order. The Articles for EWE do not contain similar language, leading the Court to conclude that the vesting of shares or membership interests in the Foreign Representatives does not activate the rights of first purchase outlined in those documents. However, it is noted that the Operating Agreement for ODE Asia, LLC may restrict the Foreign Representatives to receiving only “allocations and distributions.”
According to Article V, Paragraph 4.(b), stockholders must notify the corporation within 10 days of a Transfer Event. If the corporation fails to timely exercise its first right of purchase, the transferee may retain the stock, subject to Article V's provisions. Article V, Paragraph 5 grants the corporation a right to purchase shares upon notification of a voluntary transfer or Transfer Event, which must be exercised within 90 days of such notice or within 15 days following an appraisal, specifying details of the purchase to the stockholder.
The Court lacks evidence that the Foreign Debtors, stockholders of ODE, provided written notice to ODE regarding their bankruptcy under the Hong Kong Bankruptcy Ordinance, despite being served notice of Chapter 15 petitions on December 9, 2009. Given that Raymond Lee was the President and CEO of ODE, the requirement for written notice from the Foreign Debtors to ODE regarding their equity interests, as per Section 58(3) of the Hong Kong Bankruptcy Ordinance, is deemed unnecessary and a matter of form over substance. Additionally, the lack of a specified price for any purported transfer event complicates the application of the first right of purchase stated in Paragraph 5.
Two key observations arise from Article V, Paragraph 4(a)(iv): first, the U.S. Companies, especially ODE, were aware of the appointment of provisional trustees since August 2009, when the Foreign Debtors were declared bankrupt, or at least by December 2009 when they received notice of the Chapter 15 cases. Second, ODE did not act on any purchasing rights stemming from this event. Even if ODE were unaware of the Hong Kong ordinance, 90 days have elapsed since the Foreign Representatives filed the Turnover Motion, leading the Court to determine that ODE waived the requirement for written notice regarding the transfer event and the concept of "vesting" as a transfer event.
Moreover, Paragraph 6 of Article V of ODE's Articles of Organization provides additional protection for the U.S. Companies, stating that any transfer of shares contrary to Article V allows the corporation to purchase those shares from the owner or transferee before or after the transfer, with the option to cancel the stock certificates and deposit the purchase price in a bank account for the stockholder's benefit.
The corporation retains the right to enforce its rights through specific performance actions and may deny recognition of any transferee as a stockholder regarding dividends and voting rights until compliance with Article V is achieved. Paragraph 6 enhances protections for U.S. Companies, which did not demonstrate the willingness or ability to pay the purchase price for the Foreign Debtors’ shares, defined as the “book value per share” determined by an independent accountant. The Amended and Restated Operating Agreement for ODE, Asia, LLC specifies that no member may transfer their interest without the Manager's consent; any unauthorized transfer is deemed null and void, limiting the transferee's rights to allocations and distributions without conferring membership status. The Court does not consider vesting under the Hong Kong Bankruptcy Ordinance as a transfer, and even if it did, the Foreign Representatives are entitled to allocations as per the agreements. Ultimately, the Foreign Debtors and U.S. Companies did not meet their burden of proof regarding default provisions or transfer restrictions affecting the Turnover Motion. The Articles of Organization and the Bankruptcy Ordinance provide adequate protections for ODE, potentially exceeding those under the Bankruptcy Code. The Court recognizes the complexities of property valuations in the Oasis Group and EWE portfolios and emphasizes the Foreign Representatives' duty to maximize the value of the Foreign Debtors' equity interests while adhering to transfer restrictions and fiduciary duties imposed by Massachusetts law.
The Court finds the position of the Foreign Representatives non-adverse to the lenders, whose perspectives remain unexpressed in this matter. Based on the parties' Stipulations and presented evidence, the Court will grant the Turnover Motion. Exhibits submitted by the Foreign Representatives mirror those attached to Ivan S. Chow's Affidavit, detailing the organizational structure and equity interests of the U.S. Companies held by the Foreign Debtors. This information was part of the Foreign Debtors' Motion for Summary Judgment, in which they sought to deny the recognition of Hong Kong proceedings as foreign main proceedings. The parties agreed on "Stipulated Facts," which the Court has paraphrased for clarity in the trial exhibits, with no disputes regarding these facts.
The Oasis Northwoods LLC property at 222 Rosewood Drive, Danvers, Massachusetts, is in receivership, while Fifty Dunham Road LLC's property at 50 Dunham Road, Beverly, Massachusetts, has been sold. However, no appraisal was provided for properties owned by Goldblock Associates LLC in Lynn, Massachusetts, and Oasis Longwater LLC in Norwell, Massachusetts, despite the Debtors holding significant equity interests in these companies.
Regarding financing, Ms. Adams detailed a $58 million loan closed in April 2007, secured by Merrill Lynch and included in a securitized pool. Due to inadequate income to cover expenses, the borrower requested a transfer to a Special Servicer in 2010, paying over $1.3 million to maintain loan currency during negotiations. The interest rate was reduced from 6.125% to 3% for two years, expiring in October 2012, but significant leasing will be required to meet income needs amidst competitive market pressures.
The Foreign Debtors are in default under the loan documents, specifically for failing to dismiss involuntary bankruptcy petitions, including the Hong Kong proceedings, as stipulated in Article 7.1.b.(ii). A similar default clause applies to guarantors like Raymond Lee, who guaranteed the Wells Fargo loan. The Court recognizes the documents in the debtor's file and its own records.
Ms. Garzon's testimony included references to specific provisions of the Articles of Organization for ODE and EWE, as well as a representative Operating Agreement for ODE Asia LLC, which were submitted as evidence. The Court noted that it would address additional relevant provisions later. Under the Hong Kong Bankruptcy Ordinance, Sections 30A(3) and (4)(a) allow for the extension of a bankrupt's contribution period up to four years if they are likely to make significant contributions within five years. Sections 30A(8) and (9) permit the court to require cooperation from the bankrupt post-discharge and condition the discharge on continued contributions for a maximum of eight years. Federal preemption applies where federal and state statutes conflict, as seen in multiple cited cases. The forbearance agreement with the lender necessitates EWE to sell properties, leading the Foreign Representatives to assert their duty under Hong Kong law to protect asset value and seek involvement in the sale process and distribution of proceeds. Section 541(c) stipulates that a debtor's interest in property becomes part of the estate despite any conflicting agreements or laws, with certain exceptions regarding beneficial interests in trusts. Lastly, Section 1501(a) outlines the chapter's aim to implement the Model Law on Cross-Border Insolvency, fostering cooperation in cross-border cases.
Key stakeholders in cross-border insolvency cases include U.S. courts, trustees, debtors, and foreign authorities. The primary objectives of cross-border insolvency legislation are to ensure legal certainty for trade and investment, fair administration that safeguards all creditors' interests, protect the debtor's asset value, and facilitate the rescue of financially troubled businesses to preserve investments and employment. Section 1522 allows bankruptcy courts broad discretion to tailor relief based on specific circumstances, especially if a foreign proceeding adversely affects U.S. creditors. Article 22 emphasizes balancing the relief granted to foreign representatives with the interests of affected parties, allowing courts to impose conditions, modify, or terminate relief as needed. It also grants standing to impacted parties to seek changes to relief measures. The provisions are designed to be inclusive, avoiding restrictions based on the locality of creditors, to ensure equitable treatment without discrimination based on business location or nationality. The U.S. Companies are identified as closely held corporations, characterized by a limited shareholder base and active management by majority shareholders.
